Canadian Stocks were initial gainers yesterday until the price of oil reversed course and dropped by almost 4% by the end of the trading day. In both Canada and the United States stock markets worried about how big a “bite” the global financial crisis had taken from banks’ profits.

Economic data gave investors more reasons for caution. A gauge of manufacturing in New York State hit a record low in December, while homebuilder sentiment remained at record lows for the month.

The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

The Fed’s Open Market Committee (FOMC) will probably cut the benchmark rate in half, to 0.5%, according to the median of 84 forecasts in a Bloomberg News survey. The Central Bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets (put more money in motion).

Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is that the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money (putting more money into the economy), at a time when FOMC members have diverging views on the subject. These are historic times and it’s now or never. If economic conditions are worse than expected then don’t deliver surprises with interest rates above zero.

Bernanke, a scholar of the Great Depression, indicated in a December 1st speech that policy makers will need to focus on “the second arrow in the Federal Reserve’s quiver — the provision of liquidity,” including options such as purchasing Treasuries to inject more cash into the economy. A formal commitment to expand the balance sheet would constitute “the most extraordinary policy approach we have seen so far.”

Yesterday, we received some more information on the state of the residential real estate market in the United States. Homes in the United States have lost trillions of dollars in value during 2008, with nearly 11.7 million American households (14.3%) now owing more on their mortgage than their homes are worth, real estate website Zillow.com reported.

Home values declined 8.4% year over year during the year ending September 2008, compared to the same period in 2007 and they will probably fall further in this quarter. “This year marked the acceleration of the market correction, and is likely to end with the eighth consecutive quarter of declines in home values,” Dr. Stan Humphries, Zillow’s vice president of data and analytics, said in a statement. On the positive side, in the third quarter, “some markets - particularly those hit hardest in the downturn - showed smaller year over year declines than in the prior quarter,” he said.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices. The U.S. housing market, with falling prices, rising foreclosures, and large numbers of “underwater” mortgages, remains the largest unresolved issue for the global economy. The financial services companies have been hardest hit since they have had to market these assets on their “books” which have resulted in almost $1 trillion worth of ‘write-offs’ or losses. Additional erosion in the price of residential real estate in the United States could further magnify the problem. Lower interest rates, which will hopefully translate into lower mortgage rates, should assist in stabilizing home prices. The average home price in the United States is below $200,000 and even though things are still getting a little worse the ‘pace’ of deterioration is slowing. Today’s guidance from the Fed will be key.

The Organization of Petroleum Exporting Countries (OPEC) meets tomorrow in order to agree on oil output cuts that they say are needed to keep oil prices high enough to support oilfield investment (oil prices are higher this morning).

This morning Europe and U.S. futures are higher